INSTRUCTOR GUIDE – PART II
MANAGERIAL ECONOMICS:
A PROBLEM-SOLVING APPROACH
End-of-Chapter Questions and Answers
Luke Froeb
Brian McCann
Table of Contents
Chapters 1 and 2 - Introduction and The One Lesson of Business ............................................................... 4
Multiple Choice Questions .................................................................................................................... 4
Multiple Choice Key ............................................................................................................................. 4
Short Answer Questions ........................................................................................................................ 5
Short Answer Key .................................................................................................................................. 5
Chapter 3 - Benefits, Costs, and Decisions ............................................. Error! Bookmark not defined.
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Chapter 5 - Investment Decisions: Look Ahead and Reason Back......... Error! Bookmark not defined.
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Chapter 6 - Pricing and Demand ............................................................. Error! Bookmark not defined.
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Chapter 7 - Economies of Scope and Scale ............................................ Error! Bookmark not defined.
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Chapter 8 – Understanding Markets and Industry Changes.................... Error! Bookmark not defined.
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Chapter 9 - How to Keep Profit from Eroding........................................ Error! Bookmark not defined.
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Chapter 10 - More Complex and Realistic Pricing ................................. Error! Bookmark not defined.
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Chapter 11 - Direct Price Discrimination ............................................... Error! Bookmark not defined.
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Chapter 12 - Indirect Price Discrimination ............................................. Error! Bookmark not defined.
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Chapter 13 - Strategic Games ................................................................. Error! Bookmark not defined.
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Chapter 14 - Bargaining .......................................................................... Error! Bookmark not defined.
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Chapter 15 - Uncertainty ......................................................................... Error! Bookmark not defined.
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Chapter 16 - The Problem of Adverse Selection .................................... Error! Bookmark not defined.
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Chapter 17 - The Problem of Moral Hazard ........................................... Error! Bookmark not defined.
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Chapter 20 - Managing Vertical Relationships ....................................... Error! Bookmark not defined.
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Chapters 1 and 2 - Introduction and The One Lesson of Business
Multiple Choice Questions
1. Which of the following is most likely to value a new pickup truck?
a) A recent college graduate with a new child
b) A financially comfortable construction manager
c) A college student getting ready to move
d) A wealthy Fortune 500 executive
2. Which of the following is not an example of the government’s role in helping create wealth?
a) Assessing property taxes
b) Recording property transactions
c) Providing federal courts to adjudicate contract disputes
d) Assigning street addresses
3. When are parties likely to engage in transactions?
a) If they both gain from the transaction
b) If the sale price is above the seller’s value and below the buyer’s value
c) When the total gains from trade are greater than zero
d) All of the above
4. The existence of underemployed assets:
a) is inefficient because not all assets are being put to their highest use
b) implies the potential for money-making opportunities
c) provides the opportunity for wealth-creating transactions
d) All of the above
5. In a transaction for a good valued at $100,000 by a buyer and $95,000 by a seller, what amount of tax
would result in an unconsummated transaction?
a) Any tax amount would result in an unconsummated transaction
b) A tax of $1,500
c) A tax of $5,500
d) It depends on how much the parties are willing to pay (and accept) for the good
Multiple Choice Key
1. b
2. a
3. d
4. d
5. c
Short Answer Questions
Property Rights
Why are property rights so important in creating wealth?
Goal Alignment at a Small Manufacturing Concern
The owners of a small manufacturing concern have hired a manager to run the company with the
expectation that he will buy the company after five years. Compensation of the new vice president is a
flat salary plus 75% of first $150,000 of profit, and then 10% of profit over $150,000. Purchase price for
the company is set as 4½ times earnings (profit), computed as average annual profitability over the next
five years. Does this contract align the incentives of the new vice president with the goals of the owners?
Rent Control
Figure out how to profitably consummate the unconsummated wealth-creating transaction created by rent
control.
Price Ceilings
Defenders of communist economic systems may point out that consumers pay lower prices for certain
goods because the government imposes a limit on what producers may charge. Cite at least two other
ways that consumers may be “paying” for these goods.
Taxes
Consider a seller who values a car at $9,500 and a buyer who values the same car at $10,000. What total
surplus will result from a transaction between the two when the seller is faced with the following sales tax
rates: 0%, 2%, 4%, 6%, and 8%?
Short Answer Key
Property Rights
With individual ownership of property, owners keep the value they create by moving assets to highervalued uses thereby creating an incentive to engage in such transactions.
Goal Alignment At A Small Manufacturing Concern
No. Both the purchase price and the profit sharing create perverse incentives. The VP keeps $0.75 of
each dollar earned up to $150,000, but only $0.10 of each dollar earned after $150K. Since earning more
requires more effort (increasing marginal effort), our student has little incentive to earn more than
$150,000. And every dollar the VP earns raises the price that he will eventually pay for the company by
$4.50, effectively penalizing him for increasing company profitability.